10/16/2009 @ 1:45PM

Bad Loans Bedevil BofA

Bank of America
‘s Kenneth D. Lewis bid his farewells during Friday’s third-quarter earnings conference call, possibly his last as chief executive, and said he will enjoy watching the company from afar.

“I sit here at the moment thinking we have built the best franchise in the world,” he said when asked what lessons he will take away when he retires Dec. 31 after 40 years at the company, including eight as its chief executive. “I look forward to seeing it play out over the next few years.”

It’s just that there’s this pesky credit problem lingering around.
Bank of America
, as expected, reported a loss for the quarter. Including more than $1 billion in dividend payments to the government, the loss was $2.2 billion. The bank also cited ongoing weakness in the economy, particularly stress among consumer borrowers.

Losses from bad loans rose to $9.6 billion, up from $4.3 billion in the third quarter of last year, and nonperforming assets rose to $33.8 billion from $13.5 billion last year. The company did say the pace of deterioration in its loan books slowed, especially in the consumer portfolios, and as a result it set aside $2 billion less than it did last quarter for expected losses.

Credit quality weighed on several of Bank of America’s main businesses, driving their returns lower or into the red. Deposit-taking activities generated a profit of $798 million, about half last year. Global cards lost $1 billion and home lending lost $1.6 billion, both because of higher loss provisions. Global commercial banking profit was $40 million, down from $1 billion a year earlier.

Only brokerage and capital markets fared better, having gotten a boost from the acquisition of Merrill Lynch (the one that cost Lewis his job, incidentally). Markets profit was $2.1 billion, compared to a loss last year. Global wealth management brought in $271 million, up from $80 million last year.

That would suggest it is something other than the Merrill deal that has brought Bank of America the most financial headaches, possibly pointing to the early 2008 purchase of the troubled mortgage lender Countrywide Financial.

But the public focus has been on the problems associated with the Merrill transaction. Pressure from activist shareholders mounted during the spring and summer, and regulators and others began focusing on Bank of America’s disclosures to shareholders around the time the Merrill Lynch deal was being closed.

Lewis decided last month to step down as chief executive 18 months earlier than expected, forcing his board into a scramble to name a successor from a roster of relatively young internal candidates and possibly some financial industry executives from outside the company. On Friday, Lewis said he couldn’t pinpoint a time when the board would be finished with its search.

Lewis agreed Thursday to pay back the $1 million he has been paid so far this year and the rest of the 2009 compensation coming to him at the “suggestion” of the government’s executive pay overlord, Kenneth Feinberg, who is examining the pay practices of companies that have been given government money during the financial crisis. Lewis has received a $1.5 million annual salary for the last three years, according to regulatory filings.

Bank of America took $45 billion in funds from the Troubled Asset Relief Program, $20 billion specifically to shore it up after the Merrill deal. In a statement Thursday, the bank said “Mr. Feinberg suggested that Ken Lewis should take no compensation for 2009. Mr. Lewis agreed. Mr. Lewis added that he felt it was not in the best interest of Bank of America for him to get involved in a dispute with the paymaster.”

The salary claw back doesn’t really amount to that much anyway. It’s not clear whether Feinberg will have any right to go after the $70 million or so in pension, deferred and restricted stock Lewis has, not to mention the tens of millions of stock he has owned over the years. He walks away a rich man regardless.

However, he walks away with considerably less than the chief executive who, it could be argued, got Merrill into trouble in the first place: E. Stanley O’Neal. O’Neal was ousted from Merrill two years ago this month after losses from mortgage securities holdings started to mount and the credit crisis started to unravel. O’Neal, whose pay for 2006 and 2007 totaled almost $100 million, also left with stock and options worth, at the time, more than $160 million.